Each week we highlight the results from different technical trading methods. We also provide contrast from a fundamental analyst. It is always interesting when we find a pick where multiple methods agree. This week, two different approaches choose IBM.
Our last Stock Exchange featured multiple stock ideas from our group. That is normal with widely varying methods. The group consensus on NVDA two weeks ago was a rare situation.
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The lack of consensus is not a negative market sign; it is business as usual. Attractive trades normally vary according to your approach.
Let’s turn to this week’s ideas.
This Week -Time to Buy the Dip in IBM?
IBM has attracted a lot of recent interest. The recent earnings report was a “beat” but a miss on revenue. Analyst downgrades followed. A couple of weeks later, there was news that Warren Buffett, a major stockholder, had sold about 20% of his position. This took the stock down further. Many complain that the company earnings do not come from organic growth, but result only from “financial engineering”. Others question the business model.
This provides an interesting backdrop for Holmes, who is buying the dip.
Holmes: IBM’s two-and-a-half-month slide has brought it down to a very attractive price. We’re currently trading around pre-November levels, a remarkable bargain. Let’s check the chart:
Jeff: In today’s introduction I explained the background of the recent losses. Revenue. Financial engineering. Mr. Buffett sold 20% of his stake?
H: Who is Mr. Buffett? I just go by the charts. If he is an expert, doesn’t it make more sense to think about the 80% that he kept? I think a rebound to the 50-day moving average is quite possible.
J: Perhaps. It happens that I also hold IBM in one of our other programs – the one where we enhance yield by selling near-term calls.
H: So, you agree that the dip is worth buying?
J: Not exactly. I see the stock as safe and also paying a good dividend. My income program emphasizes safety rather than exciting growth.
H: You are hoping that the stock does nothing, then?
J: That would hit our income target (8-9% after fees), but a small upside works even better. Here is the summary chart from Chuck Carnevale’s F.A.S. T Graph program. It suggests that IBM is a solid choice, but not exciting. That is perfect for our income program.
J: No one else in the group has an opinion on IBM this week. Let’s see what they have found.
Felix: Mercadolibre (MELI) is a new position for me. It’s been on a bit of a tear since mid-April, and a steep decline just gave me a viable entry point.
F: The growth here over 6 months is steady but boring. Just how I like it! The relatively low price is appealing to buy a sizeable position and sit on it for another six months.
J: This is not what I think of as a “relatively low price.” This company is supposed to be the Latin American “Amazon.”
F: No wonder investors are so excited. I suppose you are going to show me another one of those F.A.S.T. Graph charts.
J: Yes indeed!
J: Even if the projected earnings come through, the stock is overpriced. And did you see what happened today in Brazil?
F: MELI is based in Argentina.
J: I know, but it does help to highlight the risks. What about your regular weekly ratings? Have you had reader questions?
F: Yes. Here they are.
J: Your ranking remains buy, hold, sell, depending on the color?
F: Yes, and I welcome new questions. That is how the list is built.
J: Thanks. Let us see what Road Runner has for us.
Road Runner: At a glance, RH (formerly known as Restoration Hardware) may not look like my kind of pick. My approach is to buy stocks at the bottom of a rising channel.
J: I know! I keep asking you to include the channel on your charts. This week we asked Vince (our modeling guru) to provide the chart. Maybe you can do it yourself in future weeks.
RR: Vince’s chart is perfect. I plan to hold the position for several weeks. Ideally the price will increase to the top of the channel. Whatever happens, I will sell and move on. If I had hair instead of feathers, I could say “rinse, lather, repeat.” And if I had fingers, I could draw the chart myself!
J: As a reality check, let us once again see the view from Chuck.
RR: That chart does not illustrate the channel at all!
J: No. It illustrates another of your Wile E. Coyote moments. You had better not overstay your welcome in this one. Retail stocks are widely hated right now.
Oscar: I do not have any sector shifts to report.
J: OK. Holding your positions is fine, if that is the result of your ratings. Do you still hold the restaurant group? Does it include Jack-in-the-Box (JACK)?
O: Yes. I am still holding that group, and it includes JACK.
J: Many ETFs also hold JACK. Here is the list.
O: The holding in these funds is too low to move the needle. My typical holding in a single stock is 5-6%. Each is chosen to trade tightly with the others in a sector.
J: That also means more individual stock risk.
O: True, but you cannot get the payoff without a bit more risk. I still have plenty of diversification.
J: Do you have your regular sector rating list, or have you been too focused on whether the Cubs and White Sox should make a trade?
O: Yes. Here is the sector rating list for my fans.
J: I do not see a report from that diva goddess, Athena. Where is she?
O: Still on vacation. She said that she would return when something showed some short-term momentum.
J: Did she report any sales?
O: No. She is still fully invested, but with no new choices. She quoted your instructions about “not reaching” when nothing fit.
J: Am I supposed to pay her for this?
O: We all think so. You often say that we should take what the market is giving us. That is a mixed picture right now.
Today’s post is interesting on several fronts. First, there is the absence of attention to the Washington sideshow. That dog is not barking in our model results. This is a strong endorsement of trading that seizes opportunity and avoids emotion.
Second, the models are reacting as we would expect. The trading models see opportunity on the dips. The short-term momentum models (despite my scoffing) are more cautious. This is just as we would expect.
If you do not see attractive trades in the current market, that is just fine. There are opportunities, but make sure they fit your own system. Just take what the market is giving!
Here is a summary of the cast of characters. Find your own favorite!
Stock Exchange Character Guide
|Character||Universe||Style||Average Holding Period||Exit Method||Risk Control|
|Felix||NewArc Stocks||Momentum||66 weeks||Price target||Macro and stops|
|Oscar||“Empirical” Sectors||Momentum||Six weeks||Rotation||Stops|
|Athena||NewArc Stocks||Momentum||One month||Price target||Stops|
|Holmes||NewArc Stocks||Dip-buying Mean reversion||Six weeks||Price target||Macro and stops|
|RoadRunner||NewArc Stocks||Stocks at bottom of rising range||Four weeks||Time||Time|
|Jeff||Everything||Value||One month or long term||Risk signals||Recession risk, financial stress, Macro|
Background on the Stock Exchange
Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!
Article by Jeff Miller, Dash Of Inight